WASHINGTON - Leaders of the White House economic team and the Senate's top Republican bellowed about bonuses at a bailed-out insurance giant and pledged to prevent such payments in the future.
From one Sunday talk show to the next, they tore into the contracts that American International Group asserted had to be honoured, to the tune of about US$165 million and payable to executives by Sunday -- part of a larger total payout reportedly valued at $450 million. The company has benefited from more than $170 billion in a federal rescue, and provided details of how it spent that money on Sunday.
AIG said it used its $85 billion emergency loan from the Federal Reserve Bank of New York in September primarily to put up collateral for big foreign and domestic banks, including those which have received billions in government bailout money themselves, and to help meet securities lending obligations to banks.
AIG said that between the time it received the loan on Sept. 18, 2008 and the end of the year, the company's securities lending arm used $43.7 billion in public aid to meet obligations to banks, including $7 billion paid out to Barclays PLC, $6.4 billion to Deutsche Bank and $4.5 billion to Bank of America.
Other banks receiving between $1 billion and $3 billion from AIG's securities lending unit include Citigroup Inc., Merrill Lynch, UBS AG and Morgan Stanley.
AIG said it also put up about $22.4 billion in collateral for banks to meet obligations related to risky credit default swaps -- including $4.1 billion put up for Societe General, $2.6 billion for Deutsche Bank, $2.5 billion for Goldman Sachs, and $1.8 billion for Merrill Lynch, among others.
And $27.1 billion in payments made by Maiden Lane III, the unit AIG formed to buy securities underlying risky credit default swap contracts, included $6.9 billion to Societe Generale, $5.6 billion to Goldman Sachs and $3.1 billion to Merrill Lynch.
Municipalities in certain states, including California, Virginia and Hawaii, received a total of $12.1 billion under guaranteed investment agreements. The company said it used the rest of the federal aid to fund its Maiden Lane business, repay debt and provide capital for some of its operations.
AIG has agreed to Obama administration requests to restrain future payments. Treasury Secretary Timothy Geithner pressed the president's case with AIG's chairman, Edward Liddy, last week.
"He stepped in and berated them, got them to reduce the bonuses following every legal means he has to do this," said Austan Goolsbee, staff director of President Barack Obama's Economic Recovery Advisory Board.
"I don't know why they would follow a policy that's really not sensible, is obviously going to ignite the ire of millions of people, and we've done exactly what we can do to prevent this kind of thing from happening again," Goolsbee said.
Added Lawrence Summers, Obama's top economic adviser: "The easy thing would be to just say ... off with their heads, violate the contracts. But you have to think about the consequences of breaking contracts for the overall system of law, for the overall financial system."
Summers said Geithner used all his power, "both legal and moral, to reduce the level of these bonus payments."
The Democratic administration's argument about the sanctity of contracts was more than Senate Republican leader Mitch McConnell of Kentucky could bear.
"For them to simply sit there and blame it on the previous administration or claim contract -- we all know that contracts are valid in this country, but they need to be looked at," McConnell said. "Did they enter into these contracts knowing full well that, as a practical matter, the taxpayers of the United States were going to be reimbursing their employees? Particularly employees who got them into this mess in the first place? I think it's an outrage."
AIG reported this month that it had lost $61.7 billion for the fourth quarter of last year, the largest corporate loss in history.
In a letter to Geithner dated Saturday, Liddy said outside lawyers had informed the company that AIG had contractual obligations to make the bonus payments and could face lawsuits if it did not do so.
Liddy said in his letter that "quite frankly, AIG's hands are tied," although he said that in light of the company's current situation he found it "distasteful and difficult" to recommend going forward with the payments.
Liddy said the company had entered into the bonus agreements in early 2008 before AIG got into severe financial straits and was forced to obtain a government bailout last fall.
The bulk of the payments at issue cover AIG Financial Products, the unit of the company that sold credit default swaps, the risky contracts that caused massive losses for the insurer.
Goolsbee acknowledged the AIG example could make it harder to sell the administration's financial plan to Congress.
"Yes, you worry about that backlash. But you're also angry that this would happen at an institution that has been so troubled and you're trying to save. So I think that's perfectly fair," he said.
Goolsbee appeared on "Fox News Sunday," and Summers was on CBS' "Face the Nation" and ABC's "This Week," where McConnell also was interviewed.
